US starts to take extraordinary measures to avoid hitting the debt ceiling

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The period that extraordinary measures may last is subject to “considerable uncertainty,” warned Janet Yellen.

The United States government has reached its debt limit and the Treasury Department has begun taking “extraordinary measures” to continue paying its bills, Treasury Secretary Janet Yellen told congressional leaders.

The government has a $31.4 trillion limit on how much it can borrow, and it hit that limit on Thursday.

Yellen said in a letter to House of Representatives Speaker Kevin McCarthy and other congressional leaders that she plans to temporarily suspend investments in pension funds for public employees to continue paying the bills of the government of the world’s largest economy. She also urged Congress to suspend or raise the debt ceiling to avoid a default.

“As I mentioned in my January 13 letter, the period that extraordinary measures may last is subject to significant uncertainty, including the challenges of forecasting the payments and receipts of the U.S. government months into the future,” she wrote. “I respectfully urge Congress to act quickly to protect the full faith and honor of the United States.”

Republicans now in control of the House have threatened to use the debt ceiling as leverage to demand cuts from Democrats and President Joe Biden’s administration. This has raised concerns in Washington, DC, and on Wall Street about a bloody debt-ceiling fight this year that could be at least as disruptive as the protracted battle of 2011, which led to a brief downgrade in the US credit rating and years of forced domestic and military cuts.

What would happen if these measures are exhausted without a debt limit agreement is unknown. A prolonged default could spell disaster with collapsing markets and panic-driven layoffs as confidence in a cornerstone of the global economy evaporates, the US Treasury Department said.

‘High level of uncertainty’

Analysts at Bank of America warned in a report last week that “there is a high degree of uncertainty about the speed and extent of damage to the US economy.”

The underlying challenge is that the government would have to balance its books on a daily basis if it is unable to issue debt. If the government cannot issue debt, it would have to impose spending cuts equivalent to 5 percent of the total US economy on an annual basis. Analysts say their base case scenario is that the US avoids default.

But if past debt-ceiling confrontations, such as those that occurred in 2011, are any guide, Washington could be in a nervous state of suspended animation with little progress until the “X-date,” the deadline by which the “extraordinary measures” of the Treasury are carried out. exhausted. Yellen has said she thinks that date will be in June.

In contrast to the showdown of 2011, the Federal Reserve is now raising interest rates to lower inflation and rolling down its own US debt, meaning recession fears are already high among consumers, businesses and investors.

Biden administration officials have said they will not prioritize payments to bondholders if the country passes “X date” without an agreement. Over the years, officials have studied this emergency option, which Treasury officials in several administrations have said is unworkable due to the government’s payment system.

“To some extent, the ‘extraordinary measures’ are the backup plan, and once those are exhausted, the next step is a big question mark,” Wells Fargo economists wrote in an analysis Thursday.



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